Wednesday, April 2, 2008

After talking with some traders last week and this week, I thought I would talk a little about understanding yourself and how this can help your trading.

I recently spoke with a trader who asked me why I switched using from using a particular trading method. His assumption was that it was not profitable.

Actually, it was quite profitable - however, it did not meet my personal requirements. These requirements dictate that I look for methodologies that are low risk, tend to win less than half the time, and have high R multiple gains.

So why do I have these requirements in the first place? Because of my strengths and weaknesses as a trader. Any method I trade must maximize my strengths and minimize my weaknesses.

It may seem that I am being rather "fussy" not trading an approach that "works". However, it is my firm belief that you cannot successfully trade an approach that does not psychologically and financially meet all of your requirements.

When one is first testing systems either discretionary or mechanical it is very difficult to see that there are multiple ways to be "right" in the markets. Of course for every 1 correct way there are 100 incorrect ways to do things.

My original trading journey took me down the path of backtesting ideas (first by hand and later by computer). Eventually, I realized that my strength in the real world is not programming computers. Rather it is the macro understanding of how systems work. I am not a detail oriented person in the real world - but I am very good at sensing the general pattern of things.

Summing this all up I came up with a list of my trading strengths and weaknesses:

Strengths:

1) Good at seeing the overall pattern (technically and fundamentally).2) Good at reacting quickly (played lots of video games as a kid).3) Good at risk management (know a lot about risking a little to gain a lot).4) Good at understanding market psychology (I know that most traders have a strong desire to be "right" but don't understand magnitudes of risk)

Weaknesses:

1) Poor at predicting market direction (I'm usually wrong most of the time)2) Poor at programming computers (not detail oriented enough)3) Poor at understanding complex derivatives (not going to be trading options any time soon).

Based on these strengths and weaknesses I have built a methodology that plays to my strengths while minimizing my weaknesses. Furthermore, any methodology that I consider must play to those strengths while minimizing the weaknesses.

If I had done this first (instead of just pursuing the holy grail systems that every beginning trader does) I would have been profitable long before I was.

2 comments:

Ronald Lee
said...

Identifying the strength and weaknesses of a trader is crucial as you are able to choose the right financial instrument and the trading platform that fits your lifestyle in order to achieve your investment objectives. Great post. Cheers.